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FIN--assignment 1

# FIN--assignment 1 - Part DMini case about stock valuation...

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Part D—Mini case about stock valuation at Ragan Thermal Systems 1. Since Regan had an EPS of \$4.32, while the DPS is \$54,000/50,000=\$1.08, then the Retention Ratio= (\$4.32-\$1.08)/\$4.32= 0.75 Besides, the company has the return on equity of 25%, so the growth rate of the company g= 0.75*0.25=18.75% Now assuming the company continues its current growth rate, the dividend per share this year should be D1=\$1.08*(1+18.75%) =\$1.2825 Hence, the value per share of the stock=\$1.2825/ (20%-18.75%) =\$102.6 2. First, calculate the industry average growth rate G. Through the table, we know that the industry average ROE=13% To compute the industry average EPS, we should use the real result of the EPS of Expert HVAC Corp. instead of the write-off one. So the industry average EPS= (\$0.82+1.32+2.34)/3=\$1.493, Then the Retention Ratio= (EPS-DPS)/EPS=72.77% So the industry average growth rate G=13%*72.77%=9.46% And the required return rate R equals the industry average rate 11.67%. Then to compute the stock price, the price should be divided into 2 parts: In the first 5years is kind of growing annuity, the present value of the 5years’ dividends paidPV1=\$1.08*(1+18.75%)/ (1+11.67%) +1.08*(1+18.75%) ^2/

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FIN--assignment 1 - Part DMini case about stock valuation...

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